December 28th

The ECB's original bond monetization program (the SMP) may now be defunct, having been replaced with the mythical OMT which will work as long as it never has to be used (see Spain), but its aftereffects linger on. Specifically, the aftermath of the SMP manifests itself in the weekly sterilization of accrued SMP bond purchases, which at last check amounted to some €208.5 billion. Why do we bring this up? Because a few hours earlier, the ECB failed, for the first time, to find enough demand and interest to sterilize the full amount of rolling peripheral bond purchases, and was instead able to find only enough bidders, 43 of them or the lowest in a year, to "sterilize" just €197.6 billion of the total weekly allottment. The last time the ECB failed in a sterilization action? November 29, 2011, one day before the coordinated global central bank bailout of 2011.

It seems between photos of the family Zuckerberg brunching Christmas Day and the revolt against the rules change, Instagram has been slapped with an exodus of users. As NY Post reports, Instagram, which peaked at 16.4mm users the week it rolled out the policy change, had fallen to 12.4mm users as of yesterday - a massive 25% plunge. The terms of service change which enabled the selling of user's photos 'without any compensation' seems to have perturbed more than a few tweens (including Justin Bieber and one of the Kardashians). How quickly the worm turns as these 'fad' sites come and go; from its busiest 24 hours over Thansgiving to a 25% plunge by Christmas - and all this as Twitter steps up its competition. We are sure that Facebook was priced for this decline though and will monetize the mobile exodus.

Apparently this is the message that popped up on the Congressional computer system when they were scheduling the last, last, last minute meeting before jumping over the cliff. The techies worked for hours I have heard but to no avail. What is interesting about this is that neither the computer geeks nor the people in charge of our government has any responsible position that is really useful to prevent the failure that is about to take place. The best that can even be hoped for now is some minor change in the rigging which may be heralded as “the fix to fix all fixes” but will be of little importance when considered in the light of day. I think the odds of any grand scheme that will honestly make a difference is equivalent to the value of a toe nail clipper when performing brain surgery.

The U.S. federal deficit is now exceeding $1 trillion dollars every year —up from $161 billion in 2007, the last year before the financial crisis. Spending is up some $1 trillion, as outlays for Social Security, Medicare, Medicaid and other entitlements have increased by an amount equal to the entire 2013 military budget – a budget which may again surpass the combined military expenditure of every other nation in the world. U.S. unfunded liabilities are now estimated at between $50 trillion and $100 trillion and by the end of the decade (in less than just 7 years), runaway entitlement spending will require shutting down the military or crippling many other vital domestic spending programs to head off massive deficits that will likely lead to a dollar crisis and significant inflation. No matter what deal is eventually agreed, whether before or after the new year, it will at best nibble at the edges of the trillion dollar annual deficits that are being piled up. While all the focus has been on the so called U.S. ‘fiscal cliff’, amnesia has taken hold and many market participants have forgotten about the far from resolved Eurozone debt crisis – not to mention looming debt crisis in the UK and Japan.

While the US is caught in a rancorous debate over allowing the government to define just what was and wasn't meant by the Second amendment, and how best to limit it and give the government even more powers, China is more focused on its version of the First. Because on Wednesday we reported that in its attempt to make the Internet "healthier, more cultured and safer" and to curb what Chinese regulators dub "rumors and vulgarity" it would pass a law making internet anonymity impossible. Sure enough, said proposal has now been enacted into law, which just happens to also ensure that the First amendment is never an issue China has to worry about. Per Reuters: "China unveiled tighter Internet controls on Friday, legalizing the deletion of posts or pages which are deemed to contain "illegal" information and requiring service providers to hand over such information to the authorities for punishment. The rules signal that the new leadership headed by Communist Party chief Xi Jinping will continue muzzling the often scathing, raucous online chatter in a country where the Internet offers a rare opportunity for debate." So much for reform. And so much for a democratic definition of what constitutes "illegal" information. But fear not: like in China, once the various US amendments start seeing encroaching government "redefinition" ultimately they it will be the First's turn. Alas, by then it will be too late: any complaints will by then be deemed "illegal" too.

We could say that news is actually relevant or matters in this "market" but we would be lying, just as we would be lying if we said that this market has not become so utterly predictable, with yesterday's late day market surge - on yet another ridiculous catalyst - visible from so far away, it was almost painful to watch it take place in real time. Sure enough, futures are now sliding back, and giving back much of yesterday's gains - but don't worry, in a day full of even more meetings and flashing red headlines, at least some combination of carefully phrased MSM words will set off today's algo-driven buying frenzy, guaranteeing yet another "retail investor" decides they have had it with this farcical "free market" casino for ever.

The relatively calm foreign exchange market and equity market in Asia ended abruptly in Europe. It is difficult to find the culprit, other than position squaring in thin markets, but the euro has come off a cent, dragging the franc. The MSCI Asia Pacific Index gained more than 0.5%, while European bourses are broadly lower, with the Dow Jones Stoxcx 600 off 0.3% near midday in London, led by utilities and financials. Fixed income markets are subdued. Italy's bond auction was adequately received, especially holiday conditions. There have been a few developments to note. First Japan's data was disappointing and this can only bolster the new government's attempt to stimulate the economy both monetarily and fiscally. Worker cash earnings fell a whopping 1.1% in November, nearly three times larger than the consensus. This may have been a factor behind the poor retail sales, which were flat. The consensus had expected a 0.4% increase. Weak incomes and domestic demand may have, in turn, weighed on output. In November, industrial production fell 1.7%, more than three times the decline expected.

December 27th

The death of the 'cult of equities' was a popular topic this year among both fringe blogs and the best-known institutional asset managers and sell-side strategists. As AP discusses in this excellent article, ordinary Americans - defying decades of investment history - are selling stocks for a fifth year in a row. It's the first time ordinary folks have sold during a sustained bull market since relevant records were first kept during World War II. The answer is both complex and simple but summed up best by a former stock analyst's comment that in order to buy stocks "You have to trust your government. You have to trust other governments. You have to trust Wall Street, and I don't trust any of these." With Fed policy trying to force investors back into stocks (at any cost), a former fund manager notes, presciently that, "When this policy fails, as it will, baby boomers will pay the cost in their 401(k)s." Are we the new 'Depression Babies'? We suspect so.

While the decline in initial jobless claims from a historical perspective should be a positive for economic growth in the future - it is likely to only be the case if employers began to convert part-time employees to full-time hires. This has been the hope since the end of the "Great Recession" yet subpar economic growth, increased productivity and weak consumer demand has kept businesses on the defensive to maintain profitability. The disappointment, from an economic standpoint, is that jobless claims could well hit much lower levels without a translation into stronger economic growth or significantly increased incomes.

Just when you thought the seemingly endless rabbit hole of Wall Street-Washington corruption, cronyism, co-option, crime and kickbacks may have finally come to an end, here comes the House Ethic Committee to pronounce that no ethics breaches were found among House members in its investigation involving the scandal surrounding Countrywide "VIP loans" and the "Friends of Angelo." And in just doing so, the House effectively cleared itself of any wrongdoing and that's it, case closed - move along... Move along.